A history of: The generics industry

One of the biggest bugbears of the contemporary pharmaceutical industry is the spectre of generic competition. All that time and money invested in research and development, protected so briefly, before competitors swarm in and drive down prices to near worthless. But what is the background to this industry that has so much impact on the current drugs market?

The differences between the generics industry and other pharma companies wouldn’t exist without patents – legal titles that exclude others from producing or using an invention or innovation discovered by an inventor. The first patent system was developed in Venice in 1474, followed by England in 1623, and the US in 1790 after independence¹. These systems of legal protection for innovative entrepreneurs emerged with the development of capitalism, as manufacturers wanted to secure the fruits of their investment from competition.

One country in particular didn’t follow the example of the other industrialised nations in protecting patents, however. Switzerland’s nascent pharmaceutical industry, including such future big players as Roche and Sandoz, was free of any patent restriction until 1888. Even then, the rules just protected mechanical inventions rather than chemicals, it wasn’t until the early 20th century that Swiss rules caught up with the rest of the world, leading to German legislators damning Switzerland as a “pirate state”.

“…after the Second World War, the period of exclusivity that the patent laws provided for products became increasingly important”

As a previous article noted, many of the predecessors of the pharma industry were in the patent medicines business. Misleadingly named, patent medicines weren’t actually patented, but often were trademarked. The name originated with royal “letters patent” approving a treatment in the middle ages. Perhaps the only patent medicine to be actually patented was Fletcher’s Castoria, a laxative still available on the market today.

Early pharma companies likewise didn’t rely so heavily on the patent system, often producing chemical products such as citric acid that were non-proprietary. Whilst some pharmaceuticals were patented in this era, such as Bayer’s Aspirin around the turn of the 20th century, many companies didn’t focus on this activity until surprisingly late. For instance, Pfizer’s first proprietary medicine, Terramycin, was only released in 1950².

As the pharmaceutical industry developed after the Second World War, the period of exclusivity that the patent laws provided for products became increasingly important. The increased need for proof of safety and efficacy required by regulators meant that the costs of drug development rapidly multiplied, and the patent system proved a good way to ensure a return on investment.

But this era also laid the basis for the development of the generics industry. The 1962 FDA act that required all new medicines to have proof of efficacy, also included provision for drugs produced before that date³. Drug Efficacy Study Implementation was a programme brought in that allowed pre-1962 medicines that were off-patent and proved efficacious to be produced by generics manufacturers without the need for new clinical studies.

In 1984, the US Congress went a step further and approved the Drug Price Competition and Patent Term Restoration Act, otherwise known as the Hatch-Waxman act. The act streamlined the process of getting a generic drug approved by the FDA4 . It allowed for the creation of abbreviated new drug applications or ANDAs, which don’t require pre-clinical and clinical data of safety and efficacy, but instead merely proof of bioequivalence to original approved drug, requiring a much smaller trial. The act allows for generic companies to begin work on bioequivalence studies whilst the competitor’s drug is still on-patent, a state of affairs that would amount to patent infringement in other industries.

The act has four “paragraph” routes of getting a drug to market, the fourth of which, Paragraph IV, involves challenging a still-existing patent. A successful Paragraph IV approval gives the generic manufacturer 180 days of exclusivity, allowing them to potentially achieve big profits before other generics are launched. But such applications generally provoke heavy litigation. Patent holders can apply for an automatic 30-month stay on FDA approval for a generic, and until a recent reform, could keep reapplying with multiple, tactically timed suits to delay generic entry for years. These bitter conflicts drove the massive expenditure on lawyers seen in all sectors of the healthcare industry. But despite this legal wrangling, Hatch-Waxman has provided a leap forward for the generics industry, increasing its income to $63 billion in the United States today.

“Hatch-Waxman has provided a leap forward for the generics industry, increasing its income to $63 billion in the United States today”

The generics industry has a large number of big players from countries other than the traditional industrialised nations. Today the largest generics manufacturer, Israeli company Teva can be traced back to 1901, to a drug wholesaler founded in Jerusalem in that year5. It benefited from the influx of highly trained scientists made refugees by the Nazis, and the disruption to international trade in this period made it one of the primary suppliers of drugs in the region. Teva merged with a number of Israeli companies in the 1960s and 70s, becoming Israel’s biggest producer and expanding internationally in the 1980s and 90s.

Likewise, the Indian generics industry is also known as a world leader. Ranbaxy, today India’s largest pharma company, was incorporated in 1961, and began producing generics in 1967. But Ranbaxy’s big break came in 1970 when Indira Ghandi’s government ended patent protection for pharmaceutical products in order to provide cheaper medications for their impoverished population. Ranbaxy rapidly succeeded and expanded internationally, opening a plant in Lagos in 1977. Its competitor Dr Reddy’s originated as a bulk chemicals company in the 1970s, before renaming itself and moving into the generics market in 1984. The small margins and high competition in the Indian market forced rapid improvements in production and technology, but enabled the development of a dynamic industry that has increasingly moved into innovative research and development. India was even able to move towards restoring patent protection in 2005.

Other countries, such as Brazil, Thailand, China and South Africa have become both key consumers and producers of generic drugs. Given the widespread poverty and prevalence of diseases such as HIV in these nations, support for generics has been a key political issue, with developing countries forcing pharma companies to reduce their prices in the 1990s. There has been very rapid growth – 44% growth in the Brazilian generics market in 2007 alone. Also freed from patent laws, there have been some innovations in formulation pushed forward by generics companies, such as the Fixed Dose Combination anti-retroviral tablet produced in India, which reduced the number of pills needed to be taken each day, and drove down prices. Due to a lower cost base and lower level of technology needed for mass production compared with R&amp,D, these economically smaller nations have made generics production their own.

Whilst the innovative pharma companies may feel up against the wall, the generics companies are having their own problems. The big Indian generic manufacturers are receiving competition from new upstarts, and from innovative pharma companies producing generics of their own drugs. Drugs that a few years ago could get 25% of original price when released as a generic, can now achieve only around 5%, perhaps a mark of the success of the generics industry in driving down prices.

The conflicts between generic and innovative pharmaceutical companies also reflect disputes around intellectual property in the economy more generally. Some commentators have noticed an increasing tendency to “rent-seeking” on the part of (generally Western) companies, more reliant on branding and enforcing their intellectual property rights on other manufacturers (in China and other places) than on cheaply and efficiently producing goods. The music industry faces even more severe problems than pharmaceuticals, with the internet reproducing music so cheaply that it becomes effectively free, and forcing them to rely on enforcement of copyrights to turn a profit. In biotechnology, gene patenting has aroused concern from some quarters, considering it a presumptuous restriction on naturally occurring genes.

“The small margins and high competition in the Indian market forced rapid improvements in production and technology”

Biosimilars, generic versions of biological medicines, remain a holy grail for generics companies. Whilst exactly replicating a small molecule is simple enough, small differences in cell lines and techniques can lead to big differences in the quality of the product for biologicals. As a consequence, there is much greater uncertainty in how to regulate this area, with proof of “similarity” rather than bioequivalence currently needed, meaning that much of the clinical and pre-clinical testing avoided by traditional generics is still necessary. If a more consistent means of reproducing biological medicines, or a clearer regulatory regime could be established, one imagines that the generics industry would have a similar effect on biotech as it has had on pharmaceuticals.

In conclusion, despite the negative impact on pharma companies’ bottom lines, generic competition has succeeded in providing what capitalism is best at – innovation, reduced prices, and access for more people to the best that society has to offer. Whilst it might be galling to lose out to generics producers, it is part of how capitalism operates. Just as a lack of patent protection can stifle innovation, the generics industry reminds us that an excessively restrictive intellectual property regime can artificially inflate prices and have an equally negative effect.

This is the final part in this first series of ‘A history of…’. We are interested in ideas for a second series, so if you have a suggested focus for ‘A history of…’ or would be interested to write one, just let us know through the contact form.

About the author:

Robin Walsh is a freelance writer on healthcare and the pharmaceutical industry. He is currently training to be a doctor, and previously worked in medical communications. He can be contacted at Robwalsh9@hotmail.com.